What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-09 compared with 2021-08-13 · 180 added, 173 removed, 291 unchanged (55% of the section changed)

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Sound Community Bank’s deposits are insured up to applicable limits by the FDIC.

At June 30, 2021, Sound Financial Bancorp, on a consolidated basis, had assets of $923.2 million, net loans held-for-portfolio of $633.5 million, deposits of $804.7 million and stockholders’ equity of $89.5 million.

At September 30, 2021, Sound Financial Bancorp, on a consolidated basis, had assets of $928.1 million, net loans held-for-portfolio of $661.2 million, deposits of $807.7 million and stockholders’ equity of $91.9 million.

The shares of Sound Financial Bancorp are traded on NASDAQ Capital Market under the symbol “SFBC.” Our executive offices are located at 2400 3rd Avenue, Suite 150, Seattle, Washington, 98121.

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COVID-19 Response

The Company continues to offer a variety of relief options designed to support our clients and communities we serve during the ongoing COVID-19 pandemic.

Paycheck Protection Program ("PPP") Participation.

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The first round of the program expired on August 8, 2020, and a second round reopened the program beginning January 1, 2021 through May 31, 2021.

During 2021, we continued our participation in the initial SBA PPP by processing applications for PPP loan forgiveness.

As of June 30, 2021, we had received SBA forgiveness for 881 PPP loans totaling $71.3 million out of the $76.4 million in PPP loans funded during the first PPP.

During the six months ended June 30, 2021, we began accepting and processing loan applications under the second PPP enacted in December 2020.

As of June 30, 2021, we had funded 599 PPP loans totaling $42.8 million and had received SBA forgiveness for 224 PPP loans totaling $11.8 million under the second PPP.

We had 410 PPP loans outstanding totaling $36.0 million as of June 30, 2021.

The following table summarizes our PPP participation as of June 30, 2021 (dollars in thousands):

Funded At June 30, 2021

As of September 30, 2021, we had received SBA forgiveness for 899 PPP loans totaling $74.7 million out of the $76.4 million in PPP loans funded during the first PPP.

During the nine months ended September 30, 2021, we began accepting and processing loan applications under the second PPP enacted in December 2020.

As of September 30, 2021, we had funded 599 PPP loans totaling $42.8 million and had received SBA forgiveness for 550 PPP loans totaling $32.7 million under the second PPP.

We had 66 PPP loans outstanding totaling $11.8 million as of September 30, 2021.

The following table summarizes our PPP participation as of September 30, 2021 (dollars in thousands):

Funded At September 30, 2021

Total Number of Loans Average Loan Amount Outstanding Number of Loans

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Total PPP loans $ 119,171 1,515 $ 78,661 $ 11,789 66

During the three and six months ended June 30, 2021, we recorded in interest income SBA processing fees of $856 thousand and $1.5 million, respectively, and $240 thousand for both the three and six months ended June 30, 2020.

In addition, interest income earned on PPP loans totaled $145 thousand and $276 thousand for the three and six months ended June 30, 2021 and $131 thousand for both the three and six months ended June 30, 2020.

During the three and nine months ended September 30, 2021, we recorded in interest income SBA processing fees of $1.0 million and $2.5 million, respectively, and $473 thousand and $521 thousand for the three and nine months ended September 30, 2020.

In addition, interest income earned on PPP loans totaled $46 thousand and $323 thousand for the three and nine months ended September 30, 2021 and $49 thousand and $318 thousand for the three and nine months ended September 30, 2020.

Loan Modifications.

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Deferred loans are re-evaluated at the end of the deferral period and will either return to the original loan terms or be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.

As of June 30, 2021, we had residential and commercial loans under payment relief related to COVID-19 as summarized below (dollars in thousands):

All of these loan modifications have been made in response to the COVID-19 pandemic.

The following table summarizes our loans under payment relief related to COVID-19 as of September 30, 2021 (dollars in thousands):

Second Request Third Request Fourth Request Total

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1 $ 67 2 $ 189 3 $ 677 6 $ 933

Commercial loans (2)

0 — 0 — 3 1,666 3 1,666

Total loans 4 $ 175 3 $ 1,011 5 $ 1,752 12 $ 2,938

(1) Entered into a forbearance agreement with a weighted-average loan-to-value of 75%, 37% and 72% for loans under their second, third or fourth request, respectively.

(2) Entered into an interest-only payment agreement with a weighted-average loan-to-value of 65% for loans under their fourth request.

The foregoing weighted-average loan-to-values are based on appraisals obtained at the time of loan origination and the current loan amount.

All of these loan modifications have been made in response to the COVID-19 pandemic and are not classified as troubled debt restructurings pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

The weighted-average loan-to-values are based on appraisals obtained at the time of loan origination and the current loan amount.

Of the six total loans presented above, five of these loans, or $777 thousand of the $933 thousand, are not classified as troubled debt restructurings (“TDRs”) pursuant to applicable accounting and regulatory guidance until the earlier of 60 days after the national emergency termination date or January 1, 2022.

We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.

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The Bank is managing branch access and occupancy levels in relation to cases and close contact scenarios, following governmental restrictions and considering public health authority guidelines, and encouraging remote work and supporting employees with paid time off.

As of June 30, 2021, all of our branch lobbies were open.

The Company is aware of the recent surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary.

As of September 30, 2021, all of our branch lobbies were open.

The Company is aware of the surge in COVID-19 infections arising out of the so-called Delta variant and is prepared to restore other protocols, as may prove to be necessary.

We continue to work closely with our borrowers to evaluate pandemic related challenges.

We also continue to support our not-for-profit organizations albeit most activity is virtual.

Comparison of Financial Condition at June 30, 2021 and December 31, 2020

Total assets increased $61.8 million, or 7.2%, to $923.2 million at June 30, 2021 from $861.4 million at December 31, 2020.

The increase was primarily a result of a higher balances in cash and cash equivalents and in loans held-for-portfolio.

We also continue to support our not-for-profit organizations with volunteering, donations and support of both virtual and live fund raising activities.

Comparison of Financial Condition at September 30, 2021 and December 31, 2020

Total assets increased $66.7 million, or 7.7%, to $928.1 million at September 30, 2021 from $861.4 million at December 31, 2020.

The increase was primarily a result of higher balances in loans held-for-portfolio and cash and cash equivalents, partially offset by a decrease in loans held-for-sale.

Cash and Securities.

Cash and cash equivalents increased $43.0 million, or 22.2%, to $236.8 million at June 30, 2021 from $193.8 million at December 31, 2020 primarily due to deposit growth.

Available-for-sale securities, which consist of municipal bonds and agency mortgage-backed securities decreased $2.7 million, or 26.4%, to $7.5 million at June 30, 2021 from $10.2 million at December 31, 2020 as a result of normal pay downs in investment securities during the six months ended June 30, 2021 and the call of a municipal bond for $950 thousand during the second quarter of 2021.

Loans held-for-portfolio, net, increased $26.1 million, or 4.3%, to $633.5 million at June 30, 2021 from $607.4 million at December 31, 2020, driven by our origination of $42.8 million of PPP loans in the second round, a $9.1 million increase in construction and land loans, and the purchase of $24.1 million in jumbo one-to-four family loans during the second quarter of 2021, partially offset by loan repayments, including the forgiveness by the SBA of $11.8 million of commercial business PPP loans during the period.

The following table reflects the changes in the loan mix of our loan portfolio at June 30, 2021, as compared to December 31, 2020 (dollars in thousands):

Cash and cash equivalents increased $12.9 million, or 6.6%, to $206.7 million at September 30, 2021 from $193.8 million at December 31, 2020 primarily due to significant deposit growth due to new PPP relationships and growth of existing client balances.

Available-for-sale securities, which consist of municipal bonds and agency mortgage-backed securities decreased $3.2 million, or 30.9%, to $7.1 million at September 30, 2021 from $10.2 million at December 31, 2020 as a result of normal pay downs in investment securities during the nine months ended September 30, 2021 and the call of a municipal bond for $950 thousand during the second quarter of 2021.

Loans held-for-portfolio, net, increased $53.9 million, or 8.9%, to $661.2 million at September 30, 2021 from $607.4 million at December 31, 2020, driven by a $63.7 million, or 48.7%, increase in one-to-four family loans, an $18.8 million increase in construction and land loans and an $18.5 million increase in loans for floating homes during 2021, partially offset by a $27.6 million decrease in commercial business loans, resulting from the forgiveness by the SBA of $75.9 million of PPP loans, and a $19.0 million decrease in commercial and multifamily loans during the period.

The following table reflects the changes in the loan mix of our loan portfolio at September 30, 2021, as compared to December 31, 2020 (dollars in thousands):

September 30,

2021 December 31,

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Total loans held-for-portfolio, net $ 661,224 $ 607,363 $ 53,861 8.9 %

The increase in the loan portfolio was primarily related to increases in one-to-four family loans and construction and land loans.

One-to-four family loans increased $39.7 million, or 30.4%, to $170.4 million at June 30, 2021, compared to $130.7 million at December 31, 2020, driven primarily by the purchase of $24.1 million in jumbo loans during the second quarter of 2021 and the origination of $24.1 million of conforming and non-conforming jumbo loans in our portfolio.

The increase in construction and land for the same period was primarily due to new originations and advances on previously approved loans.

These increases were partially offset by decreases in commercial and multifamily loans of $21.7 million and commercial business loans of $4.2 million.

The decrease in commercial and multifamily was primarily due to increased payoff activity.

The decrease in our commercial business loan portfolio was primarily due to SBA loan forgiveness, partially offset by our origination of 599 PPP loans totaling $42.8 million during the six months ended June 30, 2021.

At June 30, 2021, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 38.0% of total loans, one-to-four family loans, including home equity loans accounted for 28.9% of total loans, commercial business loans accounted for 9.4% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans

accounted for 12.5% of total loans at June 30, 2021.

Construction and land loans accounted for 11.2% of total loans at June 30, 2021.

The increase in one-to-four family loans was driven primarily by the purchase of $24.1 million in jumbo loans during the second quarter of 2021 and the origination of $48.6 million of conforming and non-conforming jumbo loans in our portfolio.

The increase in construction and land loans during the period was primarily due to new originations and disbursement of advances on previously originated loans and the increase in loans on floating homes was primarily a result of larger loan sizes, seasonal activity and a small competitive market for these types of loans.

The decrease in commercial and multifamily loans was primarily due to increased payoff activity.

At September 30, 2021, our loan portfolio, net of deferred loan fees, remained well-diversified.

Commercial and multifamily real estate loans accounted for 36.9% of total loans, one-to-four family loans, including home equity loans accounted for 31.2% of total loans, commercial business loans accounted for 5.6% of total loans, and consumer loans, consisting of manufactured homes, floating homes, and other consumer loans accounted for 14.3% of total loans at

September 30, 2021.

Construction and land loans accounted for 12.2% of total loans at September 30, 2021.

Allowance for Loan Losses.

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The following table reflects the adjustments in our allowance during the periods indicated (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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Ratio of net charge-offs during the period to average loans outstanding during the period — % (0.18) % (0.02) % (0.12) %

September 30,

2021 December 31,

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Allowance as a percentage of total loans (end of period) 0.95 % 0.98 %

Our allowance for loan losses increased $157 thousand, or 2.6%, to $6.2 million at June 30, 2021, from $6.0 million at December 31, 2020.

Specific loan loss reserves decreased to $337 thousand at June 30, 2021, compared to $378 thousand at December 31, 2020, while general loan loss reserves increased to $5.3 million at June 30, 2021, compared to $5.2 million at December 31, 2020 and the unallocated reserve increased to $488 thousand at June 30, 2021, compared to $406 thousand at December 31, 2020.

The increase in the general reserve was primarily a result of the increase in the loan portfolio at June 30, 2021.

The $36.0 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at June 30, 2021, as these loans are 100% guaranteed by the SBA and management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven.

Net charge-offs for the three and six months ended June 30, 2021 totaled $28 thousand and $93 thousand, respectively, compared to net charge-offs of $262 thousand and $259 thousand for the three and six months ended June 30, 2020, respectively.

At June 30, 2021, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.96% and 412.67%, respectively, compared to 0.98% and 208.04%, respectively, at December 31, 2020.

See “Comparison of Results of Operations for the Three and Six Months Ended June 30, 2021 and 2020 — Provision for Loan Losses.”

Our allowance for loan losses increased $327 thousand, or 5.5%, to $6.3 million at September 30, 2021, from $6.0 million at December 31, 2020.

Specific loan loss reserves decreased to $281 thousand at September 30, 2021, compared to $378 thousand at December 31, 2020, while general loan loss reserves decreased to $5.1 million at September 30, 2021, compared to $5.2 million at December 31, 2020 and the unallocated reserve increased to $962 thousand at September 30, 2021, compared to $406 thousand at December 31, 2020.

The increase in the unallocated reserve was primarily a result of the increase in the loan portfolio at September 30, 2021, partially offset by a positive adjustment in the qualitative factors applied to real estate related loans as a result of the improvement in economic conditions related to the strong housing market.

The $11.8 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at September 30, 2021, as these loans are 100% guaranteed by the SBA and management expects that the majority of the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reduce the Bank’s loan balance for the amount forgiven.

Net charge-offs for the three and nine months ended September 30, 2021 totaled $5 thousand and $98 thousand, respectively, compared to net charge-offs of $318 thousand and $577 thousand for the three and nine months ended September 30, 2020, respectively.

At September 30, 2021, the allowance for loan losses as a percentage of total loans and nonperforming loans was 0.95% and 206.16%, respectively, compared to 0.98% and 208.04%, respectively, at December 31, 2020.

See “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 — Provision for Loan Losses.”

Mortgage Servicing Rights.

The fair value of mortgage servicing rights was $4.2 million at June 30, 2021, an increase of $371 thousand, or 9.8%, from $3.8 million at December 31, 2020.

The fair value of mortgage servicing rights was $4.2 million at September 30, 2021, an increase of $431 thousand, or 11.4%, from $3.8 million at December 31, 2020.

We record mortgage servicing rights on loans sold with servicing retained and upon acquisition of a servicing portfolio.

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If the fair value of our mortgage servicing rights fluctuates significantly, our financial results could be materially impacted.

The increase in the fair value was primarily due to an increase in the underlying portfolio, as well as an increase in the market value of the portfolio due to slowing prepayment speeds.

Nonperforming Assets.

At June 30, 2021, nonperforming assets totaled $2.2 million, or 0.23% of total assets, compared to $3.5 million, or 0.40% of total assets at December 31, 2020.

At September 30, 2021, nonperforming assets totaled $3.7 million, or 0.40% of total assets, compared to $3.5 million, or 0.40% of total assets at December 31, 2020.

The table below sets forth the amounts and categories of nonperforming assets at the dates indicated (dollars in thousands):

Nonperforming Assets

June 30, 2021 December 31, 2020 Amount

September 30, 2021 December 31, 2020 Amount

Change Percent

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Total nonperforming assets $ 3,728 $ 3,478 $ 250 7.2 %

Nonperforming loans decreased $1.4 million, or 48.3%, to $1.5 million at June 30, 2021 from $2.9 million at December 31, 2020.

The percentage of nonperforming loans to total loans was 0.23% at June 30, 2021, compared to 0.47% of total loans at December 31, 2020.

Total deposits increased $56.7 million, or 7.6%, to $804.7 million at June 30, 2021 from $748.0 million at December 31, 2020.

The increase was due primarily to disbursements of PPP loan proceeds into borrowers’ deposit accounts as well as stimulus funds deposited, and reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

We continue our efforts to grow noninterest-bearing deposits, which increased $49.4 million, or 37.3%, to $181.8 million at June 30, 2021, compared to $132.5 million at December 31, 2020.

Noninterest-bearing deposits represented 22.6% of total deposits at June 30, 2021, compared to 17.7% at December 31, 2020.

Nonperforming loans increased $185 thousand, or 6.4%, to $3.1 million at September 30, 2021 from $2.9 million at December 31, 2020.

The percentage of nonperforming loans to total loans was 0.46% at September 30, 2021, compared to 0.47% of total loans at December 31, 2020.

Total deposits increased $59.7 million, or 8.0%, to $807.7 million at September 30, 2021 from $748.0 million at December 31, 2020.

The increase was due primarily to stimulus funds deposited, developing further relationships with PPP borrowers who were not previously clients, as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic.

We continue our efforts to grow noninterest-bearing deposits, which increased $62.4 million, or 47.1%, to $194.8 million at September 30, 2021, compared to $132.5 million at December 31, 2020.

Noninterest-bearing deposits represented 24.1% of total deposits at September 30, 2021, compared to 17.7% at December 31, 2020.

A summary of deposit accounts with the corresponding weighted-average cost of funds at the dates indicated is presented below (dollars in thousands):

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Rate Amount Wtd.

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(1) Escrow balances shown in noninterest-bearing deposits on the consolidated balance sheets.

Scheduled maturities of time deposits at September 30, 2021, are as follows (in thousands):

Year Ending December 31, Amount

2021 $ 21,405

Thereafter 1,790

Savings, demand, and money market accounts have no contractual maturity.

Certificates of deposit have maturities of five years or less.

The aggregate amount of time deposits in denominations of more than $250,000 at September 30, 2021 and December 31, 2020, totaled $25.5 million and $79.9 million, respectively.

Deposits in excess of $250,000 are not federally insured.

Stockholders’ Equity.

Total stockholders’ equity increased $4.1 million, or 4.7%, to $89.5 million at June 30, 2021, from $85.5 million at December 31, 2020.

This increase primarily reflects $4.7 million in net income for the six months ended June 30, 2021, partially offset by the payment of cash dividends of $1.1 million to common stockholders during the six months ended June 30, 2021.

Total stockholders’ equity increased $6.4 million, or 7.5%, to $91.9 million at September 30, 2021, from $85.5 million at December 31, 2020.

This increase primarily reflects $7.3 million in net income for the nine months ended September 30, 2021, partially offset by the payment of cash dividends of $1.6 million to common stockholders during the nine months ended September 30, 2021.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

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Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

Three Months Ended June 30,

Three Months Ended September 30,

Balance Interest

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Loans receivable $ 652,251 $ 8,967 5.45 % $ 693,524 $ 8,422 4.83 %

Investments and interest-bearing accounts 249,863 116 0.19 67,994 77 0.46

Investments, cash and cash equivalents 229,802 135 0.23 117,660 86 0.29

Total interest-earning assets (1)

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Average interest-earning assets to average interest-bearing liabilities 138.29 % 132.37 %

Total deposits 808,697 617 0.30 % 715,231 1,738 0.97 %

Total funding (2)

820,315 785 0.38 % 757,450 1,848 0.97 %

(1) Calculated net of deferred loan fees, loan discounts and loans in process.

Six Months Ended June 30,

(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits.

The cost of total funding is calculated as annualized total interest expense divided by average total funding.

Nine Months Ended September 30,

Balance Interest

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Loans receivable $ 636,352 $ 25,152 5.28 % $ 666,090 $ 25,463 5.09 %

Investments and interest-bearing accounts 239,733 229 0.19 64,800 314 0.97

Investments, cash and cash equivalents 236,495 365 0.21 82,799 400 0.64

Total interest-earning assets (1)

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Average interest-earning assets to average interest-bearing liabilities 137.35 % 132.18 %

Total deposits 798,384 2,807 0.47 % 673,042 5,346 1.06 %

Total funding (2)

809,991 3,311 0.55 % 693,854 5,578 1.07 %

(1) Calculated net of deferred loan fees, loan discounts and loans in process.

(2) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits.

The cost of total funding is calculated as annualized total interest expense divided by average total funding.

Rate/Volume Analysis

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For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate (dollars in thousands).

Three Months Ended June 30, 2021 vs.

Six Months Ended June 30, 2021 vs.

Three Months Ended September 30, 2021 vs.

Nine Months Ended September 30, 2021 vs.

Increase (Decrease) due to Total

3 unchanged sentences

Interest-earning assets:

Loans $ (727) $ 395 $ (332) $ (617) $ (239) $ (856)

Investments and interest-bearing accounts 84 (45) 39 167 (252) (85)

Loans receivable $ (567) $ 1,112 $ 545 $ (1,175) $ 864 $ (311)

Investments, cash and cash equivalents 66 (17) 49 237 (272) (35)

Total interest-earning assets (501) 1,095 594 (938) 592 (346)

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Certificate accounts (331) (646) (977) (870) (1,358) (2,228)

Subordinated debt 168 — 168 336 — 336

Subordinated notes 144 1 145 479 2 481

Borrowings — (87) (87) — (209) (209)

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Change in net interest income $ 1,657 $ 1,921

Comparison of Results of Operation for the Three and Six Months Ended June 30, 2021 and 2020

Comparison of Results of Operation for the Three and Nine Months Ended September 30, 2021 and 2020

Q3 2021 vs Q3 2020 .

Net income increased $123 thousand, or 5.8%, to $2.3 million, or $0.85 per diluted common share, for the three months ended June 30, 2021, compared to $2.1 million, or $0.82 per diluted common share, for the three months ended June 30, 2020.

The increase in net income was primarily the result of lower interest expense paid on deposits and an increase in noninterest income, partially offset by lower interest income earned on loans, higher interest expense paid on borrowings, and an increase in noninterest expense.

Net income increased $1.6 million, or 51.3%, to $4.7 million, or $1.78 per diluted common share, for the six months ended June 30, 2021, compared to $3.1 million, or $1.20 per diluted common share, for the six months ended June 30, 2020.

The increase was primarily a result of an increase in noninterest income of $2.1 million for the six months ended June 30, 2021, driven by an increase of $1.5 million in gains on sale of loans, partially offset by an increase in noninterest expense.

Net income increased $257 thousand, or 11.0%, to $2.6 million, or $0.98 per diluted common share, for the three months ended September 30, 2021, compared to $2.3 million, or $0.90 per diluted common share, for the three months ended September 30, 2020.

The increase in net income was primarily the result of higher interest income, lower interest expense paid on deposits and a lower provision for loan losses, partially offset by a decrease in noninterest income, higher interest expense paid on subordinated notes, and an increase in noninterest expense.

Net income increased $1.9 million, or 34.0%, to $7.3 million, or $2.76 per diluted common share, for the nine months ended September 30, 2021, compared to $5.4 million, or $2.09 per diluted common share, for the nine months ended September 30, 2020.

The increase was primarily a result of a $2.3 million decrease in interest expense, an increase in noninterest income of $1.5 million and a $500 thousand decrease in the provision for loan losses for the nine months ended September 30, 2021, partially offset by a $1.6 million increase in noninterest expense.

Interest Income

Q3 2021 vs Q3 2020 .

Interest income decreased $293 thousand, or 3.4%, to $8.4 million for the three months ended June 30, 2021, from $8.7 million for the three months ended June 30, 2020, primarily due to lower average loan balances, partially offset by a 22 basis point increase in average loan yields.

Interest income on loans decreased $332 thousand, or 3.8%, to $8.3 million for the three months ended June 30, 2021, compared to $8.6 million for the three months ended June 30, 2020, driven by lower average total loan balances resulting primarily from the decline in commercial and multifamily loans and commercial business loans.

The average balance of total loans was $628.1 million for the three months ended June 30, 2021, compared to $683.1 million for the three months ended June 30, 2020.

The average yield on total loans was 5.30% for three months ended June 30, 2021, compared to 5.08% for the three months ended June 30, 2020.

The average yield on loans increased primarily due to the recognition of net deferred fees from SBA’s forgiveness of PPP loans during the period.

For the three months ended June 30, 2021, the average balance of PPP loans was $60.0 million and the average yield on PPP loans was 6.68%, including the recognition of the net deferred fees, with a positive impact on loan yield of 15 basis points.

For the three months ended June 30, 2020, the average balance of PPP loans was $52.7 million and the average yield on PPP loans was 2.84%, including the recognition of deferred fees, with a negative impact on loan yield of 19 basis points.

Interest income included $1.0 million in fees earned related to PPP loans in the three months ended June 30, 2021, compared to $372 thousand in the same period a year ago.

At June 30, 2021, PPP deferred loan origination fees of $1.3 million remain to be accreted into interest income during the remaining life of the loans.

The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents increased $39 thousand, or 50.6%, to $116 thousand for the three months ended June 30, 2021, compared to $77 thousand for the three months ended June 30, 2020.

Interest income increased $594 thousand, or 7.0%, to $9.1 million for the three months ended September 30, 2021, from $8.5 million for the three months ended September 30, 2020, primarily due to a 62 basis point increase in the average loan yield, partially offset by lower average loan balances.

Interest income on loans increased $545 thousand, or 6.5%, to $9.0 million for the three months ended September 30, 2021, compared to $8.4 million for the three months ended September 30, 2020.

The average balance of total loans was $652.3 million for the three months ended September 30, 2021, compared to $693.5 million for the three months ended September 30, 2020 resulting primarily from the decline in commercial and multifamily loans and commercial business loans.

The average yield on total loans was 5.45% for three months ended September 30, 2021, compared to 4.83% for the three months ended September 30, 2020.

The average yield on loans increased primarily due to the recognition of net deferred fees from SBA’s forgiveness of PPP loans during the period, partially offset by adjustable rate loans resetting downward.

For the three months ended September 30, 2021, the average balance of PPP loans was $19.0 million and the average yield on PPP loans was 22.37%, including the recognition of the net deferred fees, with a positive impact on loan yield of 51 basis points.

For the three months ended September 30, 2020, the average balance of PPP loans was $74.3 million and the average yield on PPP loans was 2.80%, including the recognition of deferred fees, with a negative impact on loan yield of 24 basis points.

Interest income included $1.1 million in fees earned related to PPP loans in the three months ended September 30, 2021, compared to $522 thousand in the same period a year ago.

At September 30, 2021, PPP deferred loan origination fees of $300 thousand remain to be accreted into interest income during the remaining life of the loans.

The impact of PPP loans on loan yields will change during any period based on the volume of

prepayments or amounts forgiven by the SBA as certain criteria are met, but is expected to cease completely after the two- or five-year maturity of the loans.

Interest income on the investment portfolio and cash and cash equivalents increased $49 thousand, or 57.0%, to $135 thousand for the three months ended September 30, 2021, compared to $86 thousand for the three months ended September 30, 2020.

The increase in the interest income on investment securities and cash and cash equivalents was due to significantly higher average balances, partially offset by lower average yields.

The average balance on investments and cash and cash equivalents was $249.9 million for the three months ended June 30, 2021, compared to $68.0 million for the three months ended June 30, 2020.

The substantial increase was due to higher average cash balances primarily due to the increase in deposit balances related to SBA PPP loans originrated in the past year.

This excess liquidity negatively impacted the average yield on investments and cash and cash equivalents, which decreased to 0.19% for the three months ended June 30, 2021, compared to 0.46% for the three months ended June 30, 2020.

Interest income decreased $941 thousand, or 5.4%, to $16.4 million for the six months ended June 30, 2021, from $17.4 million for the six months ended June 30, 2020.

The average balance on investments and cash and cash equivalents was $229.8 million for the three months ended September 30, 2021, compared to $117.7 million for the three months ended September 30, 2020.

The substantial increase was due to higher average cash balances primarily due to the increase in deposit balances related to new and existing clients increasing their deposit balances.

This excess liquidity negatively impacted the average yield on investments and cash and cash equivalents, which decreased to 0.23% for the three months ended September 30, 2021, compared to 0.29% for the three months ended September 30, 2020.

Interest income decreased $346 thousand, or 1.3%, to $25.5 million for the nine months ended September 30, 2021, from $25.9 million for the nine months ended September 30, 2020.

The decrease was primarily due to a 69 basis point decline in average yield on interest-earning assets.

Interest income on loans decreased $856 thousand, or 5.0%, to $16.2 million for the six months ended June 30, 2021, compared to $17.0 million for the six months ended June 30, 2020, driven by lower average total loans resulting primarily from the decline in commercial and multifamily loans and commercial business loans and a five basis points decline in the average yield on loans.

The average balance of total loans was $628.3 million for the six months ended June 30, 2020, compared to $652.2 million for the six months ended June 30, 2020.

The average yield on total loans was 5.19% for the six months ended June 30, 2021, compared to 5.24% for the six months ended June 30, 2020.

The decline in the average yield on loans was muted by SBA’s forgiveness of PPP loans during the period.

For the six months ended June 30, 2021, the average balance of PPP loans was $57.0 million and the average yield on PPP loans was 6.21%, including the recognition of the net deferred fees, with a positive impact on average loan yield of 10 basis points.

For the six months ended June 30, 2020, the average balance of PPP loans was $26.3 million and the average yield on PPP loans was 2.83%,

including the recognition of deferred fees, with a negative impact on average loan yield of 10 basis points.

Interest income included $1.8 million in fees earned related to PPP loans in the six months ended June 30, 2021, compared to $372 thousand in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents decreased $85 thousand, or 27.1%, to $229 thousand for the six months ended June 30, 2021, compared to $314 thousand for the six months ended June 30, 2020.

Interest income on loans decreased $311 thousand, or 1.2%, to $25.2 million for the nine months ended September 30, 2021, compared to $25.5 million for the nine months ended September 30, 2020, driven by lower average total loans resulting primarily from the decline in commercial and multifamily loans and commercial business loans, partially offset a 19 basis points increase in the average yield on loans.

The average balance of total loans was $636.4 million for the nine months ended September 30, 2021, compared to $666.1 million for the nine months ended September 30, 2020.

The average yield on total loans was 5.28% for the nine months ended September 30, 2021, compared to 5.09% for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, the average balance of PPP loans was $44.2 million and the average yield on PPP loans was 8.55%, including the recognition of the net deferred fees, with a positive impact on average loan yield of 24 basis points.

For the nine months ended September 30, 2020, the average balance of PPP loans was $42.4 million and the average yield on PPP loans was 2.64%, including the recognition of deferred fees, with a negative impact on average loan yield of 17 basis points.

Interest income included $2.8 million in fees earned related to PPP loans in the nine months ended September 30, 2021, compared to $840 thousand in the same period a year ago.

Interest income on the investment portfolio and cash and cash equivalents decreased $35 thousand, or 8.8%, to $365 thousand for the nine months ended September 30, 2021, compared to $400 thousand for the nine months ended September 30, 2020.

The decrease in the interest income on investment securities and cash and cash equivalents was due to lower average yields, partially offset by higher average balances.

The average yield on investments and cash and cash equivalents was 0.19% for the six months ended June 30, 2021, compared to 0.97% for the six months ended June 30, 2020, primarily due to the substantial increase in cash and cash equivalents earning a nominal yield.

The average yield on investments and cash and cash equivalents was 0.21% for the nine months ended September 30, 2021, compared to 0.64% for the nine months ended September 30, 2020, primarily due to the substantial increase in cash and cash equivalents earning a nominal yield.

Interest Expense

Q3 2021 vs Q3 2020 .

Interest expense decreased $748 thousand, or 41.3%, to $1.1 million for the three months ended June 30, 2021, from $1.8 million for the three months ended June 30, 2020, primarily as a result of declining deposit costs, a higher percentage of noninterest bearing deposits to total deposits and repayment of FHLB advances, partially offset by the interest expense on subordinated notes issued in the third quarter of 2020.

Interest expense on deposits decreased $853 thousand, or 48.8%, to $896 thousand for the three months ended June 30, 2021, compared to $1.7 million for the same period a year ago.

The decrease was primarily the result of a decline in the weighted-average cost of deposits reflecting reduced rates paid on deposits.

In addition, deposit costs were favorably impacted by a $44.2 million increase in average noninterest bearing deposits to $179.6 million for the three months ended June 30, 2021, compared to $135.4 million for the same period last year.

The weighted-average cost of total deposits decreased 58 basis points to 0.45% for the quarter ended June 30, 2021, from 1.03% for the quarter ended June 30, 2020.

Interest expense on borrowings increased $105 thousand, or 166.7%, to $168 thousand for the three months ended June 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $63 thousand for the three months ended June 30, 2020, comprised solely of interest expense on our FHLB advances.

Average borrowings decreased $590 thousand, to $11.6 million at June 30, 2021, consisting solely of subordinated notes, from $12.2 million at June 30, 2020, which consisted solely of FHLB advances.

The weighted-average cost of the subordinated notes was 5.81% for the three months ended June 30, 2021, while the weighted-average cost of the FHLB advances was 2.08% for the three months ended June 30, 2020.

Interest expense decreased $1.2 million, or 32.3%, to $2.5 million for the six months ended June 30, 2021, from $3.7 million for the six months ended June 30, 2020, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.

Interest expense on deposits decreased $1.4 million, or 39.3%, to $2.2 million for the six months ended June 30, 2021, compared to $3.6 million for the same period a year ago.

Interest expense decreased $1.1 million, or 57.5%, to $785 thousand for the three months ended September 30, 2021, from $1.8 million for the three months ended September 30, 2020, primarily as a result of declining deposit costs, a higher percentage of noninterest bearing deposits to total deposits and repayment of FHLB advances, partially offset by the interest expense on subordinated notes issued in the third quarter of 2020.

Interest expense on deposits decreased $1.1 million, or 64.5%, to $617 thousand for the three months ended September 30, 2021, compared to $1.7 million for the same period a year ago.

The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced rates paid on all deposits and a $103.5 million or 43.3% decline in the average balance of higher cost certificate accounts.

In addition, deposit costs were favorably impacted by a $37.9 million increase in average noninterest bearing deposits to $182.5 million for the three months ended September 30, 2021, compared to $144.6 million for the same period last year.

The average cost of total deposits decreased 67 basis points to 0.30% for the quarter ended September 30, 2021, from 0.97% for the quarter ended September 30, 2020.

Interest expense on borrowings and subordinated notes increased $58 thousand, or 52.7%, to $168 thousand for the three months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $110 thousand for the three months ended September 30, 2020, comprised primarily of interest expense on our FHLB advances.

Average borrowings and subordinated notes decreased $30.6 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $42.2 million at September 30, 2020, which consisted primarily of FHLB advances.

The average cost of subordinated notes was 5.74% for the three months ended September 30, 2021, and the average cost of the subordinated notes and FHLB advances was 1.04% for the three months ended September 30, 2020.

Interest expense decreased $2.3 million, or 40.6%, to $3.3 million for the nine months ended September 30, 2021, from $5.6 million for the nine months ended September 30, 2020, primarily as a result of declining deposit costs and a higher percentage of noninterest bearing deposits to total deposits.

Interest expense on deposits decreased $2.5 million, or 47.5%, to $2.8 million for the nine months ended September 30, 2021, compared to $5.3 million for the same period a year ago.

The decrease was primarily the result of a decline in the average cost of deposits reflecting reduced market rates paid on deposits.

The average cost of total deposits decreased 55 basis points to 0.56% for the six months ended June 30, 2021, from 1.11% for the six months ended June 30, 2020.

Interest expense on borrowings increased $213 thousand, or 173.2%, to $336 thousand for the six months ended June 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $123 thousand for the six months ended June 30, 2020, which was related solely to FHLB advances.

Average borrowings increased $1.6 million, to $11.6 million at June 30, 2021, consisting solely of subordinated notes, from $10.0 million at June 30, 2020, which consisted of solely FHLB advances.

The average cost of the subordinated notes was 5.84% for the six months ended June 30, 2021, while the average cost of the FHLB advances was 2.47% for the six months ended June 30, 2020.

The average cost of total deposits decreased 59 basis points to 0.47% for the nine months ended September 30, 2021, from 1.06% for the nine months ended September 30, 2020.

Interest expense on borrowings and subordinated notes increased $272 thousand, or 117.2%, to $504 thousand for the nine months ended September 30, 2021, comprised solely of interest expense on our subordinated notes, compared to $232 thousand for the nine months ended September 30, 2020, which was related primarily to FHLB advances.

Average borrowings and subordinated notes decreased $9.2 million, to $11.6 million at September 30, 2021, consisting solely of subordinated notes, from $20.8 million at September 30, 2020, which consisted primarily of FHLB advances.

The average cost of the subordinated notes and FHLB advances was 5.81% for the nine months ended September 30, 2021, compared to 1.48% for the nine months ended September 30, 2020.

Net Interest Income.

Q3 2021 vs Q3 2020 .

Net interest income increased $455 thousand, or 6.6%, to $7.4 million for the three months ended June 30, 2021, from $6.9 million for the three months ended June 30, 2020.

Our net interest margin was 3.36% and 3.69% for the three months ended June 30, 2021 and 2020, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits.

The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market interest rate.

During the second quarter of 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 24 basis points, compared to a negative impact of 6 basis points during the quarter ended June 30, 2020.

Net interest income increased $263 thousand, or 1.9%, to $13.9 million for the six months ended June 30, 2021, from $13.6 million for the six months ended June 30, 2020.

Our net interest margin was 3.23% and 3.81% for the six months ended June 30, 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits being substantially offset by declines in both the average loan balance and yield.

Net interest income increased $1.7 million, or 24.9%, to $8.3 million for the three months ended September 30, 2021, from $6.7 million for the three months ended September 30, 2020.

Our net interest margin was 3.74% and 3.27% for the three months ended September 30, 2021 and 2020, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits and higher interest income.

The increase in net interest margin was primarily due to decline in rates paid on interest-bearing liabilities following decreases in the short-term market rates in the second quarter of 2020 exceeding the decline in yields earned on interest-earning assets.

During the third quarter of 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 41 basis points, compared to a negative impact of five basis points from our origination of low yielding PPP loans during the quarter ended September 30, 2020.

Net interest income increased $1.9 million, or 9.5%, to $22.2 million for the nine months ended September 30, 2021, from $20.3 million for the nine months ended September 30, 2020.

Our net interest margin was 3.40% and 3.61% for the nine months ended September 30, 2021, respectively.

The increase in net interest income primarily resulted from the decline in the average rate paid on deposits, partially offset by a decline in the average loan balance.

During the nine months ended September 30, 2021, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of 27 basis points, compared to a negative impact of six basis points from our origination of low yielding PPP loans during the same period in 2020.

Provision for Loan Losse s.

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Loans for which management has concerns about the borrowers’ ability to repay, are evaluated individually and specific loss allocations are provided for these loans when necessary.

A provision for loan losses of $250 thousand was recorded for both of the three and six months ended June 30, 2021, as compared to $400 thousand and $650 thousand for the three and six months ended June 30, 2020, respectively.

The decrease in the provision for loan losses in the current quarter and six-month period compared to the comparable periods in 2020 was primarily due to a decrease in the balance of loans held-for-portfolio and in the current quarter, a $2.0 million decrease in non-performing loans from June 30, 2020.

Our allowance for loan losses as of June 30, 2021, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of June 30, 2021, but also reflects the inherent economic improvements in our markets as initial COVID-19 restrictions implemented in the second quarter of last year have been lifted.

A provision for loan losses of $175 thousand and $425 thousand was recorded for the three and nine months ended September 30, 2021, as compared to $275 thousand and $925 thousand for the three and nine months ended September 30, 2020, respectively.

The decrease in the provision for loan losses in the current quarter and nine-month period compared to the comparable periods in 2020 was primarily due to a decrease in the average balance of loans held-for-portfolio between the periods, a positive adjustment to the qualitative factors applied to real estate related loans as a result of improvement in economic conditions related to the strong housing market, and to a lesser extent a $247 thousand decrease in non-performing loans from September 30, 2020.

Our allowance for loan losses as of September 30, 2021, not only reflects probable and inherent credit losses based upon the economic conditions that existed as of September 30, 2021, but also reflects the inherent economic improvements in our markets as initial COVID-19 restrictions implemented in the second quarter of last year have

While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations.

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Noninterest Income.

Noninterest income increased $133 thousand, or 8.4%, to $1.7 million for the three months ended June 30, 2021, as compared to $1.6 million for the three months ended June 30, 2020, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest income decreased $637 thousand, or 30.8%, to $1.4 million for the three months ended September 30, 2021, as compared to $2.1 million for the three months ended September 30, 2020, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

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Total noninterest income $ 1,431 $ 2,068 $ (637) (30.8) %

The increase in noninterest income during the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to $143 thousand improvement in the fair value adjustment on mortgage servicing rights and increases in both our mortgage servicing income of $86 thousand and service charges and fee income of $97 thousand, partially offset by the decrease in our net gain on sale of loans.

The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher during the quarter.

The decrease in noninterest income during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the decrease in our net gain on sale of loans, partially offset by a $498 thousand improvement in the fair value adjustment on mortgage servicing rights and increases in both our mortgage servicing income of $68 thousand and service charges and fee income of $46 thousand.

As a result of refinance activity slowing over the past six months, our residential loans originated for sale decreased.

Loans sold during the quarter ended September 30, 2021, totaled $20.3 million, compared to $89.5 million during the quarter ended September 30, 2020.

The improvement in the fair value adjustment on mortgage servicing rights resulted from loan prepayment speeds slowing during the quarter as mortgage interest rates moved slightly higher.

The increase in the service charges and fee income primarily resulted from an increase in the number of checking accounts and an increase in debit card interchange fees.

These increases were partially offset by the decrease in the net gain on sale of loans.

As a result of refinance activity slowing over the past quarter, our residential loans originated for sale decreased.

Loans sold during the quarter ended June 30, 2021, totaled $39.9 million, compared to $57.3 million during the quarter ended June 30, 2020.

Noninterest income increased $2.1 million, or 93.1%, to $4.4 million for the six months ended June 30, 2021, as compared to $2.3 million for the six months ended June 30, 2020, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

Noninterest income increased $1.5 million, or 34.2%, to $5.8 million for the nine months ended September 30, 2021, as compared to $4.4 million for the nine months ended September 30, 2020, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

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Total noninterest income $ 5,846 $ 4,355 $ 1,491 34.2 %

The increase in noninterest income during the six months ended June 30, 2021, compared to the same period in 2020 was primarily due to an increase in gain on sale of loans.

As a result of reductions in market interest rates, refinance and home purchases have increased significantly over the last year, increasing our residential loans originated for sale.

Loans sold during the six months ended June 30, 2021, totaled $108.0 million, compared to $80.6 million during the six months ended June 30, 2020.

The increase in noninterest income during the nine months ended September 30, 2021, compared to the same period in 2020 was primarily due to improvement in the fair value adjustment on mortgage servicing rights, and increases in both gain on sale of loans and in mortgage servicing income.

Net gain on sale of loans increased due to higher margins on our sales offsetting the

decrease in sales volume.

Loans sold during the nine months ended September 30, 2021, totaled $128.3 million, compared to $176.0 million during the nine months ended September 30, 2020.

Mortgage servicing income was higher as a result of our mortgage servicing portfolio increasing to $514.0 million at September 30, 2021 compared to $444.3 million at September 30, 2020.

Noninterest Expense.

Noninterest expense increased $582 thousand, or 10.8%, to $6.0 million during the three months ended June 30, 2021, compared to $5.4 million during the three months ended June 30, 2020, as reflected below (dollars in thousands):

Three Months Ended June 30, Amount

Noninterest expense increased $788 thousand, or 14.2%, to $6.3 million during the three months ended September 30, 2021, compared to $5.5 million during the three months ended September 30, 2020, as reflected below (dollars in thousands):

Three Months Ended September 30, Amount

Change Percent

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Total noninterest expense $ 6,318 $ 5,530 $ 788 14.2 %

The increase in noninterest expense during the three months ended June 30, 2021 compared to the same period in 2020 was due to an increase in salaries and benefits of $496 thousand primarily due to higher deferred compensation during 2020 and an increase in data processing expense of $168 thousand due to technology investments and variable costs associated with increased loan originations.

These increases were partially offset by a decrease of $88 thousand in occupancy expense.

Noninterest expense increased $799 thousand, or 7.0%, to $12.2 million during the six months ended June 30, 2021, compared to $11.4 million during the six months ended June 30, 2020, as reflected below (dollars in thousands):

Six Months Ended June 30, Amount

The increase in noninterest expense during the three months ended September 30, 2021 compared to the same period in 2020 was due to an increase in salaries and benefits of $632 thousand primarily due to higher wages and incentive compensation and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage activity in third quarter of 2021 as compared to the same period in 2020.

Data processing expense also increased $101 thousand due to technology investments.

Noninterest expense increased $1.6 million, or 9.4%, to $18.5 million during the nine months ended September 30, 2021, compared to $16.9 million during the nine months ended September 30, 2020, as reflected below (dollars in thousands):

Nine Months Ended September 30, Amount

Change Percent

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Total noninterest expense $ 18,468 $ 16,882 $ 1,586 9.4 %

The increase in noninterest expense during the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to increases of $905 thousand in salaries and benefits and $378 thousand in data processing expense, partially offset by a $153 thousand decrease in operations expense, a $177 thousand decrease in regulatory assessments and a $138 thousand decrease in occupancy expense.

Salaries and benefits increased primarily due to discretionary bonuses paid for added efforts associated with the Company's COVID-19 response, implementation and execution of the SBA's PPP and higher medical expenses during 2021 as compared to 2020.

The increase in noninterest expense during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to increases of $1.5 million in salaries and benefits and $477 thousand in data processing expense, partially offset by a $76 thousand decrease in operations expense, a $197 thousand decrease in regulatory assessments and a $139 thousand decrease in occupancy expense.

Salaries and benefits increased primarily due to discretionary bonuses paid for added efforts associated with the Company's COVID-19 response, higher wages, lower deferred compensation and higher medical expenses during 2021 as compared to 2020.

Data processing expense increased due to technology investments and variable costs associated with increased loan originations.

Operations expense decreased primarily due to lower loan expenses and office operations, and regulatory assessments decreased as the six months ended June 30, 2020 included regulatory examination costs.

Operations expense decreased primarily due to lower loan expenses and office operations, and regulatory assessments decreased as the nine months ended September 30, 2020 included regulatory examination costs.

Occupancy expense decreased due to the closure of one branch location in June 2020.

The efficiency ratio for the quarter ended June 30, 2021 was 66.07%, compared to 63.79% for the quarter ended June 30, 2020, and was 66.38% for the six months ended June 30, 2021, compared to 71.34% for the six months ended June 30, 2020.

The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense, partially offset by higher interest income and noninterest income.

The improvement in the efficiency ratio was primarily due to higher noninterest income for the six months ended June 30, 2021.

The efficiency ratio for the quarter ended September 30, 2021 was 64.81%, compared to 63.36% for the quarter ended September 30, 2020, and was 65.83% for the nine months ended September 30, 2021, compared to 68.51% for the nine months ended September 30, 2020.

The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense, partially offset by slightly higher revenues.

The improvement in the efficiency ratio for the nine months ended September 30, 2021 was primarily due to higher revenues, partially offset by higher noninterest expense.

Income Tax Expense .

We incurred income tax expense of $574 thousand and $1.2 million for the three and six months ended June 30, 2021, respectively, as compared $541 thousand and $802 thousand for the same periods in 2020.

The effective tax rates for the three and six months ended June 30, 2021 were 20.32% and 20.35%, respectively.

The effective tax rates for the three and six months ended June 30, 2020 were 20.27% and 20.51%, respectively.

We incurred income tax expense of $663 thousand and $1.9 million for the three and nine months ended September 30, 2021, respectively, as compared $588 thousand and $1.4 million for the same periods in 2020.

The effective tax rates for the three and nine months ended September 30, 2021 were 20.37% and 20.36%, respectively.

The effective tax rates for the three and nine months ended September 30, 2020 were 20.12% and 20.34%, respectively.

Liquidity and Capital Resources

The Management Discussion and Analysis in Item 7 of the Company’s 2020 Form 10-K contains an overview of Sound Financial Bancorp’s and the Bank’s liquidity management, sources of liquidity and cash flows.

This discussion updates that disclosure for the six months ended June 30, 2021.

This discussion updates that disclosure for the nine months ended September 30, 2021.

The Bank’s primary sources of funds are deposits, principal and interest payments on loans and borrowings.

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The Bank maintains liquidity levels it believes to be adequate to fund loan commitments, investment opportunities, deposit withdrawals and other financial commitments.

At June 30, 2021, the Bank had $244.3 million in cash and investment securities available-for-sale and $3.7 million in loans held-for-sale generally available for its cash needs.

Also, at June 30, 2021, the Bank had the ability to borrow an additional $131.9 million in FHLB advances based on existing collateral pledged, and could access $24.8 million through the Federal Reserve’s Discount Window.

Additionally, as of June 30, 2021, the Bank was approved to utilize the PPPLF.

The Bank may utilize the PPPLF pursuant to which the Bank will pledge PPP loans at face value as collateral to obtain FRB non-recourse loans.

During the quarter ended and as of June 30, 2021, the Bank did not utilize the PPPLF as it held a substantial cash and cash equivalent position as a result of PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit customers increasing their balances due to COVID-19.

The termination date for the PPPLF is July 30, 2021;

as a result, no new extensions of credit will be made under the PPPLF after that date.

At June 30, 2021, we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding.

At September 30, 2021, the Bank had $213.8 million in cash and investment securities available-for-sale and $3.9 million in loans held-for-sale generally available for its cash needs.

Also, at September 30, 2021, the Bank had the ability to borrow an additional $121.6 million in FHLB advances based on existing collateral pledged, and could access $22.6 million through the Federal Reserve’s Discount Window.

At September 30, 2021, we also had available a total of $20.0 million in credit facilities with other financial institutions, with no balance outstanding.

The Bank uses these sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals and loan commitments.

At June 30, 2021, outstanding loan commitments totaled $85.7 million, including unused lines and letters of credit of $25.3 million and undisbursed construction and land loans of $38.2 million.

Certificates of deposit scheduled to mature in one year or less at June 30, 2021, totaled $93.1 million.

Cash and cash equivalents increased $43.0 million to $236.8 million as of June 30, 2021, from $193.8 million as of December 31, 2020.

Net cash provided by operating activities was $14.3 million for the six months ended June 30, 2021.

Net cash used in investing activities totaled $27.0 million during the six months ended June 30, 2021 and consisted primarily of increases in loans and the purchase of BOLI, partially offset by principal payments on maturities of investment securities.

The $55.7 million of net cash provided by financing activities during the six months ended June 30, 2021 primarily was the result of a $56.7 million net increase in deposits.

At June 30, 2021, the Company, on an unconsolidated basis, had $5.4 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

At September 30, 2021, outstanding loan commitments totaled $84.5 million, including unused lines and letters of credit of $34.5 million and undisbursed construction and land loans of $43.1 million.

Certificates of deposit scheduled to mature in one year or less at September 30, 2021, totaled $57.8 million.

Cash and cash equivalents increased $12.9 million to $206.7 million as of September 30, 2021, from $193.8 million as of December 31, 2020.

Net cash provided by operating activities was $12.0 million for the nine months ended September 30, 2021.

Net cash used in investing activities totaled $57.6 million during the nine months ended September 30, 2021 and consisted primarily of increases in loans and the purchase of BOLI, partially offset by principal payments on and maturities of investment securities.

The $58.4 million of net cash provided by financing activities during the nine months ended September 30, 2021 primarily was the result of a $59.7 million net increase in deposits, partially offset by the payment of $1.6 million of dividends on our common stock.

At September 30, 2021, the Company, on an unconsolidated basis, had $4.6 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.

The long-term ability of the Company to pay dividends to its stockholders is based primarily upon the ability of the Bank to make capital distributions to the Company.

So long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), as discussed below, and operates in a safe and sound manner, it is management's belief that its banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

As long as the Bank remains well capitalized after each capital distribution (as evidenced by maintaining a Community Bank Leverage Ratio ("CBLR") greater than the required percentage), as discussed below, and operates in a safe and sound manner, it is management's belief that its banking regulators will continue to allow the Bank to distribute its earnings to the Company, although no assurance can be given in this regard.

In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements.

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These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

A summary of our off-balance sheet loan commitments at June 30, 2021, is as follows (in thousands):

June 30, 2021

A summary of our off-balance sheet loan commitments at September 30, 2021, is as follows (in thousands):

September 30, 2021

Commitments to make loans $ 6,774

5 unchanged sentences

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank per the regulatory framework for prompt corrective action (“PCA”).

Qualifying institutions that

elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of June 30, 2021, the Bank and Company’s CBLR was 10.28% and 9.57%, respectively, which exceeded the minimum requirements.

Qualifying institutions that elect to use the CBLR framework, such as the Bank and the Company, that maintain the required minimum leverage ratio will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the regulatory agencies' capital rules, and to have met the capital requirements for the well capitalized category under the agencies’ PCA framework.

As of September 30, 2021, the Bank and Company’s CBLR was 10.56% and 9.80%, respectively, which exceeded the minimum requirements.

See "Part I, Item 1.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis